K-IFRS is taking root

When Korea accepted IMF bail-out package in 1997 to overcome severe financial crisis, Korea carried out a large scale of intense restructuring. As a part of reforming, Korea Generally Accepted Accounting Principles (K-GAAP) was made out to enhance accounting creditability. K-GAAP, however, was not enough to coincide with international standard, so Korean companies used to be derided with backwardness of accounting standards. As a result, Korea International Financial Reporting Standards (K-IFRS) was phased in from 2009, and the year 2011 was the first year for listed companies and financial companies to write the financial reports in accordance with K-IFRS, as a mandatory requirement.

Accordingly, Financial Supervisory Services (FSS) conducted to examine 2011 financial reports. Total 1,600 financial reports which consist of 655 listed on Korean Composite Stock Price Index (KOSPI) and 945 listed on Korea Securities Dealers Automated Quotation (KOSDAQ) were examined with 121 items.

The result of assessment is meant to be satisfactory. The major incompleteness which can affect users to misunderstand accounting information is not found. Compared to the first quarterly report in 2011 when the major incompleteness was found in 111 reports, this result deserves to be admirable. As a matter of fact, average number of errors per company committed was found only 4.5. The number of financial reports without any errors was as many as 288. The following table is a summary of the examination result.

Section

Market

Volume of Capital (Billion KRW)

KOSPI

KOSDAQ

Less than 100

100-500

500-2000

Over 2000

Average error/company

3.8

5.0

5.0

4.3

4.1

3.1

Total No. of company

655

945

671

646

183

100

According to the table, the smaller sized companies tend to make more errors than the bigger sized companies. Therefore, FSS will keep giving advices and instruction for those imperfect companies continuously. To modify the found errors, FSS is noticing privately for the companies to encourage modifying their own record.

Furthermore, there is an increasing trend that even not listed companies voluntarily make financial reports in conformity with K-IFRS voluntarily. Generally, adopting K-IFRS from 2011 is mandatory only for the listed companies and financial companies. However, despite of needlessness, 1,142 unlisted companies wrote their financial reports with using K-IFRS in 2011, and additional 261 companies are prospected to adopt K-IFRS in 2012. The major reasons for such trends to adopt K-IFRS voluntarily, notwithstanding the high converting cost, are the accordance of accounting standard between the holding company and the subsidiary company, preparation for the list, enhancing of accounting transparency and improvement of company image.

Korean financial authorities have made endeavours to achieve the competitiveness of accounting system. These endeavours are resulting in the improvement of accounting creditability of Korean companies. Also, it is positive sign for many unlisted companies to adopt K-IFRS spontaneously. At this rate, it is matter of time for IFRS to become established in Korea.

Chaehack Suh (chaeahck.suh@gmail.com)

Preparing for the IFRS: Reinforcing Auditing

The FSC, the FSS and the accounting industry discussed last week to reinforce accounting auditing regarding listed companies, and to reinforce prevention of window dressing and various kinds of accounting fraud.

Window dressing activities were witnessed recently among marginal firms, and the problem was further aggravated as accounting firms deliberately neglected these frauds. Such incidents underlined the imminent need to improve policies that can prevent window dressing and loose auditing. Also, such revision is impending when considering the wholesale introduction of IFRS in 2011.

Starting from 2011, the adoption of the IFRS will become mandatory for listed companies with asset over 2 trillion won accompanied with voluntary early adoption from 2009 except financial institutions. However, companies of which asset is less than 2 trillion won are allowed to keep their current accounting system until 2013. (For further information on the impact of IFRS introduction in Korea please see: https://fsckorea.wordpress.com/2010/02/21/how-korean-companies-will-be-affected-by-adopting-ifrs/)

The foremost problem to be addressed amidst the introduction of IFRS is the improvement of the quality of auditors. The auditors will need to register themselves to the Securities and Futures Commission (SFC) so that the commission can periodically inspect their qualities as auditors. In addition, the SFC is expected to have broader rights in appointing auditors especially to listed companies which are undergoing fallout.

Accordingly, the auditing will become stricter. A new provision will be established to allow criminal prosecution of acts of coercion towards auditors. It has been found out that auditing activities had been seriously hindered due to blackmailing and coercion of auditors. The new law resembles that of the U.S which penalizes coercive activities towards auditors by fining maximum of 5 million dollars.

The regulations have not been yet revised nor enacted; however inspection definitely has been reinforced. The accounting industry has recently reinforced its auditing standards: listed companies are faced with strong inspection and are under risk of being disqualified as listed companies. The accounting firms have already announced ‘rejection’ to over 24 firms, including one firm of which the aggregate value of listed stock was over 0.4 trillion won. Furthermore, the accounting firms are ruling harshly towards late submission of audit report, which usually had not been expected as a rejection criterion.

Such phenomenon is the result of the reinforcing inspection of auditing itself: the accounting firms now have more risk to become regulated by the financial regulatory branch. Along with revision of the regulations by the FSC, the FSS recently announced to embark on auditing 8 accounting firms and 240 listed companies, focusing on their financial statements.

The improvements regarding the overall auditing policies by the FSC will be prepared during the first half of this year and are expected to be legislated.

Eunhou Song (amber1547@gmail.com)

How Korean companies will be affected by adopting IFRS

 

Over 100 countries around the world either have adopted or will adopt the International Financial Reporting Standard (IFRS).  In line with this global trend, Korea announced its own roadmap for convergence with IFRS in March 2007 in order to reform its local capital markets and enhance transparency in financial reporting. 

At the end of 2007, the Korean International Financial Reporting Standards (K-IFRS) was released. The K-IFRS are a word-for-word translation of the full IFRS issued by the International Accounting Standards Board (IASB) and will become mandatory for Korean listed companies with asset over 2 trillion won, from 2011, with voluntary early adoption for all companies from 2009 except financial institutions. However, companies, of which asset is less than 2 trillion won, is allowed to keep their current accounting system until 2013. 

What has changed?

Revaluation of assets 

One of the main changes incurred by introducing IFRS is that unlike K-GAAP, K-IFRS generally uses historical cost, but intangible assets, property, plant and equipment (PPE) an investment property may be revalued to fair value. Derivatives and certain other financial instruments and biological assets are also revalued to fair value. Because of these changes, if revaluation makes profit, companies are able to expect to a decrease in liabilities. Therefore, companies owning many of fine tangible assets such as land, buildings are expected to get benefits by adopting IFRS to their current accounting system and it will make their books more attractive. 

Changes in the recognition of A/C Receivables 

However, under IFRS, accounts receivables are recognized as liability to the companies until the actual cash inflow occurs. For example, construction and shipbuilding companies were able to recognize certain percentage of their completeness of works as sales or revenue, but from next year, those receivables are only recognized when the actual cash inflows are incurred and works are completed. Therefore, companies in those industries are likely to have more liabilities than current accounting system on their books. 

Combined financial statements 

After adopting IFRS, the balance sheet and income statements are reported as consolidated statements quarterly. By implementing worldwide used of a single set of high quality financial reporting standard, it is expected easier to compare domestic and foreign companies that mainly use consolidated financial statements. Also, it will not be necessary for companies to duplicate similar external financial statements; hence it will reduce the costs and time of making two types of financial statements. 

Increase in the amount of notes 

From 2009, 11 domestic companies tested the external financial statements by IFRS, 50 ~ 60% of accounts were resulted to reduce but notes were increased twice than before, since IFRS recommend to simplify the accounts and make notes for further explanation. Simplified financial statements might cause the confusion when the external users interpret the financial statement. Companies need to be clear when they make notes on their financial statements, also external users will be needed to look reports more carefully. 

Need IFRS experts

When the whole adoption is completed, it is expected that companies demand IFRS experts for more efficient work process. Also, external auditing companies and financial regulators will require IFRS experts. To meet these demands, Korea will need professional and systematic training system for the current and future accountant. 

Supports from Financial Services Commission

For smooth adoption of IFRS, Korean companies will need stable finance/accounting regulatory system. Financial Services Commission (FSC) helps them by making and exercising those regulations. FSC made and run IFRS consulting team, which consists of worldwide renowned professional and IFRS experts. FSC is also running task force team that helps IFRS adoption and settlement. FSC is also supporting relatively small companies, of which asset is less than 2 trillion won, by considering their current situations and allowing them to adopt IFRS until 2013 because cost of changing accounting system is too demanding for those companies. Under those supports, by using K-IFRS, Korean companies are expected to get benefits, as more capital will be gathered from investors around the world. 

by Taewon Jang (taewon.jang83@gmail.com)